NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE
MONTH PERIODS ENDED
MARCH 31, 2017
AND
2016
(Unaudited)
The accompanying unaudited condensed consolidated financial statements of Exactech, Inc. and its subsidiaries (the “Company” or “Exactech”), which are for interim periods, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission relating to interim financial statements. These unaudited condensed consolidated financial statements do not include all disclosures provided in the Company's audited annual financial statements. The condensed financial statements should be read in conjunction with the audited financial statements and notes contained in Exactech's Annual Report on Form 10-K for the year ended
December 31, 2016
, as filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included, consisting of normal recurring adjustments. Our subsidiaries, Exactech Asia, Exactech UK, Exactech Japan, Exactech France, Exactech Taiwan, Exactech Deutschland, Exactech Ibérica, Exactech International Operations, Blue Ortho, Exactech Australia and Exactech U.S., are consolidated for financial reporting purposes, and all intercompany balances and transactions have been eliminated. Results of operations for the three month period ended
March 31, 2017
are not necessarily indicative of the results to be expected for the full year.
Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation.
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2.
|
NEW ACCOUNTING PRONOUNCEMENTS AND STANDARDS
|
In January 2017, the Financial Accounting Standards Board (“FASB”) issued amended guidance to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. The amended guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for periods beginning after December 15, 2016. We are currently assessing the impact on our financial statements of adopting this guidance.
In January 2017, the FASB issued amended guidance on the accounting for business combinations to clarify the definition of a business and to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the guidance, if substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not expect the adoption to have a material impact on our financial statements.
In November 2016, the FASB issued new guidance, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. The new standard is required to be applied retrospectively. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not expect the adoption to have a material impact on our financial statements.
In October 2016, the FASB issued new guidance which allows recognition of the income tax consequences upon intra-entity transfers of assets other than inventory when the transfer occurs. The guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The new guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In August 2016, the FASB issued new guidance to clarify how certain transactions are presented and classified in the statement of cash flows. The guidance is aimed at reducing the existing diversity in practice. The guidance will be effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In February 2016, the FASB issued updated guidance on leases. The new standard requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. A modified retrospective approach should be applied for leases existing at the beginning of the earliest comparative period presented in the financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In September 2015, the FASB issued guidance on business combination provisional adjustments during the measurement period. The new standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance is effective for annual and interim periods beginning on or after December 15, 2017, and early application is permitted. We are currently assessing the impact of adopting this guidance on our financial statements; however, we do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.
In May 2014, the FASB issued new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. The new guidance is based on the principle that revenue is recognized upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and clarify guidance for multiple-element arrangements. The guidance is effective for the first fiscal quarter of 2018, and early application is permitted for periods beginning on or after January 1, 2017. Companies have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholders' Equity. We plan to adopt the new guidance effective January 1, 2018. At this time we have not identified any material impact on our financial position or results of operations that would result in the year of adoption. However, we are still assessing the impact and expect that assessment to be completed during the first half of 2017. We plan to adopt the new guidance under the retrospective approach.
In March 2016, the FASB issued updated guidance related to accounting for employee share-based payments. The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted the guidance effective January 1, 2017, with the income tax effects of vested or settled awards recognized in the provision for income taxes on our income statement on a prospective basis. The tax effects were previously recorded in equity excess of par value. The tax expense was $
30,000
for the quarter ended March 31, 2017. The impact of the new guidance will fluctuate depending on the timing of award vesting or exercises, or our tax rate and the intrinsic value when awards vest or are exercised.
Our financial instruments include cash and cash equivalents, trade receivables, debt, and cash flow hedges. The carrying amounts of cash and cash equivalents, and trade receivables approximate fair value due to their short maturities. The carrying amount of debt approximates fair value due to the variable rate associated with the debt. The fair value of cash flow hedges are based on dealer quotes.
The table below provides information on our assets and liabilities that are measured at fair value on a recurring basis:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Total Fair Value at March 31, 2017
|
|
Quoted Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
March 31, 2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Long-term earn-out receivable
|
$
|
2,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,463
|
|
|
Total:
|
$
|
2,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,463
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
5,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,616
|
|
|
Total:
|
$
|
5,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,616
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
7,912
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,912
|
|
|
Total:
|
$
|
7,912
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,912
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2017 we obtained a long-term earn-out receivable for
$3.0 million
as partial payment for the sale of our spine business. The fair value of of the receivable is management's estimate based on the present value of estimated milestone payments, and adjusted for collectibility assumptions. The fair value of our contingent consideration liability for the Blue Ortho and Exactech Australia acquisitions is management's estimate based on the present value of estimated payment scenarios, which is determined based on inputs not observable in the market. We use assumptions we believe would be made by a market participant. We evaluate our estimates on a quarterly basis, as we obtain additional data impacting the assumptions, and recognize any changes in the unaudited condensed consolidated statements of income. See Note 12, Business Acquisition, for further discussion on the contingent consideration.
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4.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Goodwill –
The following table provides the changes to the carrying value of goodwill for the
three
month period ended
March 31, 2017
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(in thousands)
|
Extremities
|
|
Knee
|
|
Hip
|
|
Other
|
|
Total
|
Balance as of December 31, 2016
|
$
|
5,154
|
|
|
$
|
6,449
|
|
|
$
|
1,301
|
|
|
$
|
915
|
|
|
$
|
13,819
|
|
Foreign currency translation effects
|
140
|
|
|
153
|
|
|
45
|
|
|
24
|
|
|
362
|
|
Balance as of March 31, 2017
|
$
|
5,294
|
|
|
$
|
6,602
|
|
|
$
|
1,346
|
|
|
$
|
939
|
|
|
$
|
14,181
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually as of the 1
st
of October. Our impairment analysis as of
October 1, 2016
resulted in a full impairment of our biologics and spine goodwill, which we impaired in the fourth quarter of 2016. No other impairment to goodwill was indicated.
Other Intangible Assets –
The following table summarizes the carrying values of our other intangible assets at
March 31, 2017
and
December 31, 2016
:
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|
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|
|
|
|
|
|
|
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|
(in thousands)
|
Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Weighted Avg Amortization Period
|
Balance at March 31, 2017
|
|
|
|
|
|
|
|
Product licenses and designs
|
$
|
14,945
|
|
|
$
|
6,085
|
|
|
$
|
8,860
|
|
|
11.3
|
Patents and trademarks
|
4,182
|
|
|
3,413
|
|
|
769
|
|
|
12.9
|
Customer relationships
|
1,493
|
|
|
1,005
|
|
|
488
|
|
|
6.9
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
|
|
|
|
|
Product licenses and designs
|
$
|
14,842
|
|
|
$
|
5,740
|
|
|
$
|
9,102
|
|
|
11.5
|
Patents and trademarks
|
4,182
|
|
|
3,361
|
|
|
821
|
|
|
14.0
|
Customer relationships
|
1,438
|
|
|
962
|
|
|
476
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
5.
|
HEDGING ACTIVITIES AND FOREIGN CURRENCY TRANSLATION
|
Foreign Currency Transactions
The following table provides information on the components of our foreign currency activities recognized in the unaudited condensed consolidated statements of income:
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|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Foreign currency transactions gain
|
$
|
532
|
|
|
$
|
726
|
|
Foreign currency option gain (loss)
|
30
|
|
|
(232
|
)
|
Foreign currency gain, net
|
$
|
562
|
|
|
$
|
494
|
|
|
|
|
|
Foreign Currency Transactions
–
Gains and losses resulting from our transactions and our subsidiaries’ transactions that are made in currencies different from our and their own are included in income as they occur and as other income (expense) in the condensed consolidated statements of income.
Foreign Currency Options
–
During the first quarter of 2017, we entered into foreign currency forward contracts as economic hedges against exchange rate fluctuations of the U.S. Dollar (USD) against the Euro (EUR) and the Australian Dollar (AUD), through two foreign currency forward contracts that expired at the end of the quarter. During the quarter ended
March 31, 2017
, we recognized a gain of
$30,000
, related to these instruments. The recognized gains are recorded in other income (expense) in the unaudited condensed consolidated statements of income related to the fair value of these currency options based upon dealers' quotes.
During the first quarter of 2016, we entered into foreign currency forward contracts as economic hedges against the continued strengthening of the USD against the EUR and the Japanese Yen (JPY). During the quarter ended
March 31, 2016
, we recognized a loss of
$0.2 million
related to these instruments. The recognized losses were recorded in other income (expense) in the unaudited condensed consolidated statements of income related to the fair value of these currency options based upon dealers' quotes.
Foreign Currency Translation
We are exposed to market risk related to changes in foreign currency exchange rates. The functional currency of substantially all of our international subsidiaries is their local currency. Transactions are translated into USD, and translation gains and losses are recognized in “Other comprehensive income (loss)”. Fluctuations in exchange rates affect our financial position and results of operations. The majority of our foreign currency exposure is to the EUR, British Pound (GBP), JPY, and AUD. During the quarter ended
March 31, 2017
, translation losses were
$0.2 million
, which were primarily due to the weakening of the JPY and the EUR against the USD early in the quarter. During the quarter ended
March 31, 2016
, translation gains were
$2.6 million
, which were primarily due to the weakening of the JPY against the USD, offset partially by the strengthening of the EUR and GBP against the USD. While we may
experience translation gains and losses during the balance of the year ending
December 31, 2017
, these gains and losses are not expected to have a material adverse effect on our financial position, results of operations, or cash flows.
Inventories are valued at the lower of cost or net realizable value using a FIFO inventory method. Inventory is comprised of implants and instruments held for sale, including implants consigned or loaned to customers and agents. The consigned or loaned inventory remains our inventory until we are notified of the implantation. Our independent agents have contractual responsibility for any discrepancies in our consigned or loaned inventory, which can result in the agent’s loss of compensation if the inventory is lost. We are required to maintain substantial levels of inventory because it is necessary to maintain all sizes of each component to fill customer orders. The size of the component to be used for a specific patient is typically not known with certainty until the time of surgery, and certain sizes are typically used less frequently than the “standard” sizes. Due to this uncertainty, a minimum of one of each size of each component in the system to be used must be available to each sales representative at the time of surgery, including unusual sizes that will be sold less frequently than “standard” sizes. Although we may conclude that it is more likely than not that all quantities on hand of certain sizes will eventually not be sold, we do not consider such items “excess inventory,” as our business model requires that we maintain such quantities in order to sell the “standard” sizes.
As a result of the need to maintain substantial levels of all sizes and components of inventory, we are subject to the risk of inventory obsolescence. In the event that a substantial portion of our inventory becomes obsolete, it would have a material adverse effect on the Company. For items that we identify as obsolete, we record a charge to reduce their carrying value to net realizable value. We also maintain an allowance for lost or damaged inventory to allow for the cost of items that are lost or damaged. We experienced charges related to the lost or damaged and obsolete inventory allowances of
$0.4 million
and
$5,000
, during the quarters ended
March 31, 2017
and
2016
, respectively.
An allowance charge for slow moving inventories is recorded based upon an analysis of slow moving inventory items within a product group level. The slow moving inventory allowance is analyzed and calculated based on comparing the current quantity of inventory to historical sales and provides an allowance for any slow moving inventory on a systematic basis, which recognizes the cost of anticipated future obsolescence over the average fifteen year expected life of product groups. We believe this method is appropriate as it recognizes the lack of utility of these items (as a charge to cost of goods sold) over the related product group revenue life cycle. The key inputs to our slow moving allowance are trailing twelve months usage and the expected product life. As the slow moving allowance is an estimate of future obsolescence, changes in sales patterns from historical trends and future product release schedules, could impact the slow moving allowance balance, and result in higher or lower charges to the periodic cost of goods sold. As of
March 31, 2017
, we have inventory items with a cost basis of approximately
$16.5 million
that we determined to be slow moving inventory and for which we have provided an allowance of approximately
$11.8 million
. We experienced charges related to the slow moving inventory allowances of
$0.5 million
and
$0.8 million
, during the quarters ended
March 31, 2017
and
2016
, respectively.
We also test our inventory levels for the amount of inventory that we expect to sell within one year. Due to the scope of products required to support surgeries and the fact that we stock new subsidiaries, add consignment locations, and launch new products, the level of inventory often exceeds the forecasted level of cost of goods sold for the next twelve months. We classify our estimate of such inventory as non-current.
The following table summarizes our classifications of inventory as of
March 31, 2017
and
December 31, 2016
:
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|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
21,323
|
|
|
$
|
23,183
|
|
Work in process
|
1,675
|
|
|
1,634
|
|
Finished goods on hand
|
11,239
|
|
|
7,913
|
|
Finished goods on loan/consignment
|
45,059
|
|
|
48,257
|
|
Inventory total
|
79,296
|
|
|
80,987
|
|
Non-current inventories
|
13,107
|
|
|
15,723
|
|
Inventories, current
|
$
|
66,189
|
|
|
$
|
65,264
|
|
|
|
|
|
At
March 31, 2017
, net operating loss carry forwards of our foreign and domestic subsidiaries totaled
$32.4 million
, some of which begin to expire in 2020. For accounting purposes, the estimated tax effect of this net operating loss carry forward results in a deferred tax asset. The deferred tax asset associated with these losses was
$9.3 million
with a valuation allowance of
$7.4 million
charged against this deferred tax asset assuming these losses will not be fully realized. At
December 31, 2016
, these net operating loss carry forwards totaled
$32.6 million
, and the deferred tax asset was
$9.5 million
with a valuation allowance of
$7.3 million
charged against this deferred tax asset assuming these losses will not be fully realized.
Our income tax returns are subject to examination in numerous state, federal and foreign jurisdictions due to the multiple income tax jurisdictions in which we operate. We are not currently aware of any open examinations by the various government jurisdictions. As of
March 31, 2017
, we had
no
liability recorded as an uncertain tax benefit.
Debt consisted of the following at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2017
|
|
December 31,
2016
|
Business line of credit payable on a revolving basis, plus interest based on adjustable rate as determined by one month LIBOR based on our ratio of funded debt to EBITDA, 2.25% as of March 31, 2017.
|
16,000
|
|
|
20,000
|
|
Total debt
|
$
|
16,000
|
|
|
$
|
20,000
|
|
|
|
|
|
The following is a schedule of future debt maturities as of
March 31, 2017
, for the years ending
December 31
(in thousands):
|
|
|
|
|
|
|
2017
|
$
|
—
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
16,000
|
|
2021
|
—
|
|
Thereafter
|
—
|
|
|
$
|
16,000
|
|
|
|
|
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
There are various claims, lawsuits, and disputes with third parties and pending actions involving various allegations against us incident to the operation of our business, principally product liability cases. While we believe that the various claims are without merit, we are unable to predict the ultimate outcome of such litigation. We therefore maintain insurance, subject to self-insured retention limits, for all such claims, and establish accruals for product liability and other claims based upon our experience with similar past claims, advice of counsel and the best information reasonably available. At
March 31, 2017
and
December 31, 2016
, we had
$100,000
and
$25,000
accrued, respectively, for product liability claims. These product liability claims are subject to various uncertainties, and it is possible that they may be resolved unfavorably to us. While it is not possible to predict with certainty the outcome of the various cases, it is the opinion of management that, upon ultimate resolution, the cases will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our insurance policies covering product liability claims must be renewed annually. Although we have been able to obtain insurance coverage for product liability claims at a cost and on other terms and conditions that have been acceptable to us, we may not be able to procure acceptable policies in the future.
Purchase Commitments
At
March 31, 2017
, we had outstanding commitments for the purchase of inventory, raw materials and supplies of
$18.2 million
and outstanding commitments for the purchase of capital equipment of
$5.8 million
. Purchases under our distribution agreements were
$0.8 million
during the
three
months ended
March 31, 2017
.
We evaluate our operating segments by our major product lines: extremity, knee, hip, and other products. The “other products” segment includes miscellaneous sales categories, such as bone cement, instrument rental fees, shipping charges, and other implant product lines. We have also aggregated our remaining biologics and spine products into the "other" segment. To conform to current period presentation we have reclassified prior period biologics and spine results to the "other" segment, and prior period instrument sales and segment profit (loss) from the "other" segment to their individual product lines. Evaluation of the performance of operating segments is based on their respective incomes from operations before taxes, interest income and expense, and nonrecurring items. Intersegment sales and transfers are not significant. The accounting policies of the reportable segments are the same as those described in Note 2 of the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Total assets not identified with a specific segment are listed as “corporate” and include cash and cash equivalents, accounts receivable, income taxes receivable, deposits and prepaid expenses, deferred tax assets, land, facilities, office furniture and computer equipment, notes receivable, and other investments. Depreciation and amortization on corporate assets is allocated to the product segments for purposes of evaluating the income (loss) from operations, and capitalized surgical instruments are allocated to the appropriate product line supported by those assets.
Summarized information concerning our reportable segments is shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Extremity
|
Knee
|
Hip
|
Other
|
Corporate
|
Total
|
2017
|
|
|
|
|
|
|
Net sales
|
$
|
29,965
|
|
$
|
20,041
|
|
$
|
12,128
|
|
$
|
7,348
|
|
$
|
—
|
|
$
|
69,482
|
|
Segment profit (loss)
|
4,273
|
|
1,211
|
|
1,091
|
|
(206
|
)
|
482
|
|
6,851
|
|
Total assets, net
|
43,364
|
|
65,868
|
|
40,436
|
|
5,472
|
|
141,955
|
|
297,095
|
|
Capital expenditures
|
2,248
|
|
1,152
|
|
990
|
|
3,392
|
|
3,539
|
|
11,321
|
|
Depreciation and Amortization
|
1,683
|
|
712
|
|
866
|
|
259
|
|
1,436
|
|
4,956
|
|
2016
|
|
|
|
|
|
|
Net sales
|
$
|
24,820
|
|
$
|
19,812
|
|
$
|
11,435
|
|
$
|
9,231
|
|
$
|
—
|
|
$
|
65,298
|
|
Segment profit (loss)
|
3,937
|
|
1,217
|
|
1,023
|
|
126
|
|
276
|
|
6,579
|
|
Total assets, net
|
40,933
|
|
73,144
|
|
38,818
|
|
35,570
|
|
102,264
|
|
290,729
|
|
Capital expenditures
|
1,252
|
|
1,208
|
|
1,002
|
|
4,403
|
|
1,456
|
|
9,321
|
|
Depreciation and Amortization
|
712
|
|
1,988
|
|
669
|
|
434
|
|
857
|
|
4,660
|
|
|
|
|
|
|
|
|
Geographic distribution of our long-lived assets and inventory is shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of:
|
March 31, 2017
|
|
December 31, 2016
|
|
Domestic
|
|
International
|
|
Domestic
|
|
International
|
Long lived assets, gross
|
$
|
172,233
|
|
|
$
|
67,183
|
|
|
$
|
167,326
|
|
|
$
|
63,805
|
|
Accumulated depreciation and amortization
|
(89,057
|
)
|
|
(25,920
|
)
|
|
(89,445
|
)
|
|
(23,980
|
)
|
Long lived assets, net
|
83,176
|
|
|
41,263
|
|
|
77,881
|
|
|
39,825
|
|
|
|
|
|
|
|
|
|
Inventory
|
$
|
46,430
|
|
|
$
|
32,866
|
|
|
$
|
47,538
|
|
|
$
|
33,449
|
|
|
|
|
|
|
|
|
|
Geographic distribution of our sales is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
2017
|
|
2016
|
|
% Inc/Decr
|
Domestic sales
|
$
|
47,673
|
|
|
$
|
44,573
|
|
|
7.0
|
International sales
|
21,809
|
|
|
20,725
|
|
|
5.2
|
Total sales
|
$
|
69,482
|
|
|
$
|
65,298
|
|
|
6.4
|
|
|
|
|
|
|
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Numerator)
|
Shares (Denominator)
|
Per Share
|
|
Income (Numerator)
|
Shares (Denominator)
|
Per Share
|
|
Three Months Ended
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
March 31, 2017
|
|
March 31, 2016
|
Net income
|
$
|
4,584
|
|
|
|
|
$
|
4,402
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
4,584
|
|
14,272
|
|
$
|
0.32
|
|
|
$
|
4,402
|
|
14,057
|
|
$
|
0.31
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
|
182
|
|
|
|
|
116
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Net income available to common shareholders plus assumed conversions
|
$
|
4,584
|
|
14,454
|
|
$
|
0.32
|
|
|
$
|
4,402
|
|
14,173
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
For the
three
months ended
March 31, 2017
, weighted average options to purchase
189,858
shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method. For the
three
months ended
March 31, 2016
, weighted average options to purchase
503,978
shares of common stock were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method.
Changes in Shareholders’ Equity:
The following is a summary of the changes in shareholders’ equity for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Retained Earnings
|
|
Common Stock Held in Treasury
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total
|
(in thousands)
|
Shares
|
|
Amount
|
|
Balance December 31, 2016
|
14,413
|
|
|
$
|
144
|
|
|
$
|
87,319
|
|
|
$
|
158,432
|
|
|
$
|
(3,042
|
)
|
|
$
|
(8,611
|
)
|
|
$
|
234,242
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
4,584
|
|
|
—
|
|
|
—
|
|
|
4,584
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(229
|
)
|
|
(229
|
)
|
Exercise of stock options
|
48
|
|
|
1
|
|
|
909
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
910
|
|
Issuance of restricted common stock for services
|
4
|
|
|
—
|
|
|
97
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
97
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
10
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
213
|
|
Compensation cost of stock options
|
—
|
|
|
—
|
|
|
460
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
460
|
|
Balance March 31, 2017
|
14,475
|
|
|
$
|
145
|
|
|
$
|
88,998
|
|
|
$
|
163,016
|
|
|
$
|
(3,042
|
)
|
|
$
|
(8,840
|
)
|
|
$
|
240,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
In December 2015, our Board of Directors authorized the repurchase of up to
1.0 million
shares of our common stock over a
two
year period. As of
March 31, 2017
, we have reacquired
163,529
shares of our common stock at an average price of
$18.60
per share, or an aggregate of
$3.0 million
.
Stock-based Compensation Awards:
We sponsor an Executive Incentive Compensation Plan, which provides for the award of stock-based compensation, including options, stock appreciation rights, restricted stock and other stock-based incentive compensation awards to key employees, directors and independent agents and consultants. We implemented a comprehensive, consolidated incentive compensation plan upon shareholder approval at our Annual Meeting of Shareholders on May 7, 2009,
referred to as the 2009 Plan, which was amended and restated at our 2014 Annual Meeting of Shareholders, held on May 8, 2014, to increase the maximum number of shares issuable under the 2009 Plan by
500,000
. The maximum number of common shares issuable under the amended and restated 2009 Plan is
1,500,000
plus (a) the number of shares with respect to awards previously granted under our preexisting plans that terminate without being exercised, expire, are forfeited or canceled, plus (b) the number of shares that remain available for future issuance under our preexisting plans plus (c) the number of shares that are surrendered in payment of any awards or any tax withholding with respect thereto. Common stock issued upon exercise of stock options is settled with authorized but unissued shares available. Under the 2009 Plan, the exercise price of option awards equals the market price of our common stock on the date of grant, and each award has a maximum term of
ten
years. As of
March 31, 2017
, there were
407,715
total shares remaining issuable under the 2009 Plan.
The aggregate compensation cost charged against income with respect to awards issued under the 2009 Plan and the 2009 Employee Stock Purchase Plan, referred to as the 2009 ESPP, was
$0.5 million
and
$0.6 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. Income tax benefit on exercises of non-qualified stock options was
$0.1 million
and
$0.2 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. As of
March 31, 2017
, total unrecognized compensation cost related to unvested awards was
$0.8 million
and is expected to be recognized over a weighted-average period of
1.34 years
.
Stock Options:
A summary of the status of stock option activity under our stock-based compensation plans as of
March 31, 2017
and changes during the year to date is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Options
|
|
Weighted Avg Exercise Price
|
|
Weighted Avg Remaining Contractual Term
|
|
Aggregate Intrinsic Value (In thousands)
|
Outstanding - January 1
|
902,775
|
|
|
$
|
19.43
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(47,999
|
)
|
|
18.94
|
|
|
|
|
$
|
267
|
|
Forfeited or Expired
|
(1
|
)
|
|
18.95
|
|
|
|
|
|
Outstanding - March 31
|
854,775
|
|
|
$
|
19.46
|
|
|
3.37
|
|
$
|
4,909
|
|
Exercisable - March 31
|
535,264
|
|
|
$
|
18.11
|
|
|
2.72
|
|
$
|
3,795
|
|
|
|
|
|
|
|
|
|
Outstanding options, consisting of
five
-year to
ten
-year incentive and non-qualified stock options, vest and become exercisable ratably over a
three
to
five
year period from the date of grant. The outstanding options expire from
five
to
ten
years from the date of grant or upon termination of employment with Exactech, and are contingent upon continued employment during the applicable option term. Certain non-qualified stock options are granted to non-employee sales agents and consultants, and they typically vest ratably over a period of
three
to
four
years from the date of grant and expire in
five
years or less from the date of grant, or upon termination of the agent's or consultant’s contract with Exactech. No stock options for the purchase of shares of common stock were granted during either of the
three
months ended
March 31, 2017
and
2016
.
Restricted Stock Awards:
Under the 2009 Plan, we may grant restricted stock awards to eligible employees, directors, and independent agents and consultants. Restrictions on transferability, risk of forfeiture and other restrictions are determined by the Compensation Committee of the Board of Directors, or the Committee, at the time of the award. During February 2017, the Committee approved equity compensation to the outside members of the Board of Directors for their service on the Board of Directors. The annual compensation for each director consists of the grant of stock awards with an aggregate market value of
$77,500
, payable in four equal quarterly grants of common stock based on the market prices of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the
first three months
of
2017
is presented below:
|
|
|
|
|
|
|
Grant date
|
February 28, 2017
|
|
Aggregate shares of restricted stock granted
|
3,985
|
|
Grant date fair value
|
$
|
97,000
|
|
Weighted average fair value per share
|
$
|
24.30
|
|
|
|
During February 2016, the Committee approved equity compensation to the outside members of the Board of Directors for their service on the Board of Directors. The annual compensation for each director consisted of the grant of stock awards with an aggregate market value of
$77,500
, payable in four equal quarterly grants of common stock based on the market prices of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the
first three months
of
2016
is presented below:
|
|
|
|
|
|
|
Grant date
|
February 29, 2016
|
|
Aggregate shares of restricted stock granted
|
5,190
|
|
Grant date fair value
|
$
|
97,000
|
|
Weighted average fair value per share
|
$
|
18.65
|
|
|
|
All of the restricted stock awards in
2017
and
2016
were fully vested at each of the grant dates. The restricted stock awards require no service period and thus contain no risk of, or provision for, forfeiture.
Employee Stock Purchase Plan:
On February 18, 2009, our board of directors adopted the 2009 ESPP, and our shareholders approved the 2009 ESPP at our Annual Meeting of Shareholders on May 7, 2009. Under the 2009 ESPP, employees are able to purchase shares of our common stock at a
fifteen percent
15%
discount via payroll deduction, up to a maximum number of shares issuable under the 2009 ESPP of
450,000
. There are
four
offering periods during an annual period. As of
March 31, 2017
,
127,687
shares remained available for purchase under this 2009 ESPP. The fair value of the employees' purchase rights is estimated using the Black-Scholes model. Purchase information and fair value assumptions are presented in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
2017
|
|
2016
|
Shares purchased
|
9,940
|
|
11,538
|
Dividend yield
|
—
|
|
—
|
Expected life
|
1 year
|
|
1 year
|
Expected volatility
|
34%
|
|
33%
|
Risk free interest rates
|
0.9%
|
|
0.7%
|
Weighted average per share fair value
|
$5.99
|
|
$3.91
|
|
|
|
|
Exactech Australia
On
February 1, 2016
, we completed the acquisition of all of the outstanding capital stock of Exactech Australia Pty Ltd, an Australia-based company. Exactech Australia was our independent importer and distribution partner in Australia between 2013 - 2016. The acquisition was accomplished to further the partnership between us and the team at Exactech Australia and to further service customers in the Asia Pacific area.
The aggregate purchase price for Exactech Australia will range from
$3.1 million
AUD to
$7.6 million
AUD, of which
$1.6 million
, or
$1.1 million
USD at a
0.7034
AUD:USD exchange rate at closing, was paid to the Exactech Australia shareholders in cash at the closing of the acquisition, and the remainder will be paid to such shareholders contingent on the achievement of certain future milestones. The first contingent consideration payment of
$1.2 million
was paid in February 2017, and we expect the final payment to be made during the first quarter of 2018. Consideration also included
$2.0 million
USD in forgiven accounts receivable that were owed to us as of February 1, 2016. The estimated fair value of the contingent consideration was determined using the following assumptions: discount rate of
3.7%
, probability levels of milestone range of outcomes, and expected timing of achievement of contingent consideration earn-out amounts. We financed the acquisition from our operating cash flows.
We acquired tangible assets of
$2.7 million
, assumed liabilities of
$0.4 million
, intangible assets, comprising customer relationships of
$0.5 million
, and goodwill of
$2.8 million
. Upon completion of the acquisition, we effectively concluded a pre-existing distribution agreement for the distribution of our products, which was stated at fair value; therefore, we recognized no impact to the statement of income. The accounting for our acquisition of Exactech Australia was finalized as of
December 31, 2016
. The goodwill was determined as the excess of the consideration over the fair value of the net assets acquired, and was due to the synergies we obtained in the extended service in Australia. Goodwill was allocated to the knee, extremity and hip segments based on expected sales for the segments. Pro-forma revenue and earnings for the business combination have not been presented because the effects, both individually and in the aggregate, were not material to our results of operations.
Blue Ortho
On
January 15, 2015
, we completed the acquisition of all of the outstanding capital stock of Blue Ortho SAS, a France-based company. Blue Ortho is the computer-assisted surgical technology development and manufacturing firm that partnered with the Company to develop the ExactechGPS
®
Guided Personalized Surgery system. The aggregate purchase price for Blue Ortho is a maximum of
€10.0 million
, of which
€2.0 million
, or
$2.3 million
at a
1.16
EUR:USD exchange rate at closing, was paid to the Blue Ortho shareholders in cash at the closing of the acquisition, and payment of the remainder is contingent on the achievement of certain milestones. We expect the contingent consideration to be paid over the next five to ten years. We acquired tangible assets of
$1.5 million
, assumed liabilities of
$2.9 million
, intangible assets, comprising product licenses and designs, of
$7.5 million
, and goodwill of
$6.5 million
.
Contingent Consideration
The following table summarizes the contingent consideration balance and activity for the quarter ended
March 31, 2017
, and the year ended
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exactech Australia
|
Blue Ortho
|
Total
|
Contingent liability balance, December 31, 2015
|
—
|
|
6,222
|
|
6,222
|
|
Initial fair value of contingent consideration
|
2,435
|
|
—
|
|
2,435
|
|
Period change in valuation
|
(125
|
)
|
187
|
|
62
|
|
Payments
|
—
|
|
(669
|
)
|
(669
|
)
|
Foreign currency translation effects
|
63
|
|
(201
|
)
|
(138
|
)
|
Contingent liability balance, December 31, 2016
|
2,373
|
|
5,539
|
|
7,912
|
|
Period change in valuation
|
13
|
|
25
|
|
38
|
|
Payments
|
(1,206
|
)
|
(1,383
|
)
|
(2,589
|
)
|
Foreign currency translation effects
|
165
|
|
90
|
|
255
|
|
Contingent liability balance, March 31, 2017
|
1,345
|
|
4,271
|
|
5,616
|
|
Current liability
|
1,345
|
|
1,460
|
|
2,805
|
|
Non-current liability
|
—
|
|
2,811
|
|
2,811
|
|
|
|
|
|
|
Due to our expected timing of earn-out payments, a portion of the contingent consideration is classified in other current liabilities on our consolidated balance sheets. The remainder is classified as other non-current liabilities. The change in the period change in valuation contingent consideration during the quarter ended
March 31, 2017
was interest expense. The change in the contingent consideration during the year ended
December 31, 2016
included interest expense of
$0.3 million
and a gain from a change in the expectations of contingent payment of
$0.2 million
. Both adjustments were recognized in other income (expense) in the consolidated statements of income.